What would you do if your financial investments took a hit? And can you really afford that special holiday you want? Financial adviser Morven Millar offers Merrick Life readers some simple steps to getting savvy about money.
Someone facing life post-divorce may well need to answer some or all of the the questions above. Making a new financial plan for yourself is something that can be prompted by any significant change in financial circumstances. It is particularly useful following divorce as you will not only have a new set of financial circumstances to adapt to, but also other changes in your life.
First thing’s first, you need to look at your essential fixed expenditures. These are things that you have to pay for like mortgage/rent, council tax, bills, child-care costs, school fees, travel expenses, insurances etc.
A good financial plan really should ensure that in your worst-case scenario, your fixed expenditures can still be covered – usually for a period of around 12 months. This is what financial planners call your ‘emergency fund’. It’s a pot of money that you can readily access as and when life deals an unexpected turn.
Once you have the basics covered, you can turn to look at the non-essential costs in your life; your discretionary spending. These will vary from person to person and could range from getting your hair and nails done, right through to holidays.
Taking a look at and totalling these up often gives people the biggest shock.
Clothes shopping, entertainment, a meal out with friends, a night at the cinema, a family day trip…all these things quickly add up. Consider the additional costs to the things you do too.
Although the headline price of a flight to Spain may seem quite reasonable, you also need to take account of expenses such as transport and eating out whilst you are away.
In the past, where you may have been used to two incomes coming in and splitting some of these costs with your spouse/civil partner, you may not have felt the financial pressure of such outgoings. But when coupled with your essential expenditures, you may need to re-think how you manage and go about your spending.
You may have received a lump sum post-divorce which needs to fund your lifestyle for the foreseeable future. It is vital to properly plan how this can be utilised to its full potential for as long as possible.
One of the tools we use as financial advisers is cash flow modelling. Essentially, this involves processing the figures around your current and forecasted wealth, along with income and expenditure, to create a snapshot of your finances both now and in the future.
It’s a really useful process to go through with clients. It clearly demonstrates the affordability of their lifestyle – or not, as the case may be.
This process is becoming even more important for clients as life expectancy increases. It is forecast that nearly one in five people currently living in the UK will reach their 100th birthday. So any pot of money invested now will need to last longer than it would have done in previous generations.
We take into account inflation because the cost of goods and services generally goes up every year. For example, if prices increase 2% annually, over 20 years the purchasing power of your money reduces by one third.
Sometimes, clients that go through the cash flow modelling process with us receive a short, sharp shock. They realise that if they maintain their current spending habits, their money is going to run out. However, once a sensible plan has been put in place that balances expenditure with a sustainable portfolio, clients are always in a much stronger position.
Just as things change within an individual’s life and personal circumstances, so do external factors that can influence the markets. As a result, it can become necessary to review and tweak a financial plan.
This is why it’s vital to undertake a review of your financial plan with your adviser on an annual basis. Whether it’s Brexit, a change in Government, or legislation changes, a good financial adviser will sit down and say, ‘these are the sort of things that we need to adjust for’.
For example, between 2015 and 2018, the majority of investors experienced a buoyant three years. That means even after drawing an income out, the purchasing power of their money would have remained due to the overall growth of their investments.
But then we hit the end of 2018 and suddenly there was a nosedive in the markets. We’re now having to prepare clients for the fact that they may have to pull in the purse strings. It has been a ‘flat year’ with most people being lucky to be level or any form of positive return.
This is where we can show our real value as financial advisers. It’s our job to ensure that clients make informed decisions regarding their money and that it can ultimately help them to achieve their lifestyle and financial goals in both the short and long term.
Morven is a founder Director of Gresham Wealth Management Ltd and a Fellow of the Personal Finance Society. She advises in all areas of financial planning and is a registered Pensions Specialist working closely with professional connections in many areas but in particular, complex matrimonial settlements.